Munis Could Get Stuck Between Capped Exemption, Subsided Options

By Michael Aneiro

Among the many, many, many many many market pundits weighing in on the fiscal cliff, today we offer Matt Fabian of Municipal Market Advisors with his take on what muni investors should expect, and how they might position themselves.

MMA sees a possible cap for muni tax exemption at a 28% rate, and a tug-of-war between efforts to curb muni tax exemption and attempts to revive some form of a federally subsidized taxable muni bond market, a la Build America Bonds. From MMA:

The likely approach to tax reform by Congress is the reason [for] our belief that the 28% dilution plan, and thus a limit on the value of the municipal bond tax exemption, “has legs” following the President s victory. While Democrats have long expressed support for subsidies of state and local infrastructure programs, their current policy ideas for our sector remain focused on reviving the Build America Bond program as an offset to any higher capital costs forced by the tax expenditure cap. MMA believes that market participants and their DC lobby efforts are being presented with a choice: either continue to request a return of the BAB program and accept a debilitated tax-exemption as its cost, or fully reject any return of BABs and hope to retain the full tax-exemption. To us, these are far and away the two most likely output scenarios for reform discussions in 2013. Participants should plan accordingly.